China’s restriction on import of recyclables - impact on Victorian Local Government

What has happened? On 1 January 2018 the People’s Republic of China (China) imposed restrictions on the import of recyclable materials into China.

The restrictions lower contamination levels on imported recyclable materials and reduce the grant of import licences. Recyclable material generated in Australia is unlikely to meet the lower contamination requirement.

Local Councils across Victoria provide services for the collection or drop-off of recyclable material. Arrangements vary across municipalities (kerbside collection and transfer station drop-off), although all configurations rely on the private sector to recycle or export the material.

Visy, SKM and Polytrade are the major exporters servicing Local Government in Victoria.

SKM’s trading capacity has been substantially reduced following a major fire at its Coolaroo facility in July 2017. The State Government introduced new requirements restricting the storage of combustible material in response to the incident.

The disruption to the export market and tightening regulation domestically is flowing through the logistics chain linking domestic kerbside collection, sorting and transferring, to export and processing.

These events are likely to result in an increase of recyclable material disposed of to landfill until alternative export and domestic recyclable options are established.

What is the impact on existing contracts for Local Government?

The impact of this market disruption will depend on the specific terms of each individual contract which must be considered on its own terms. The impact of market disruption raises a number of contractual issues that may be relevant in the current circumstances. We highlight some of these issues below.

Force majeure

A waste contract may include a force majeure provision that provides relief from performance of the contract if a force majeure event occurs. The definition of force majeure event can vary between contracts. A force majeure event typically includes events such as war, terrorist attack, flood and fire and other extreme events. An affected party is usually excused from performance of the contract whilst the force majeure event persists. Prolonged force majeure may lead to termination of the contract. Whether such a provision applies to the current circumstances depends on whether restriction on imports into China can be considered a force majeure event.

Change in law

A change in law may also provide relief for the contractor. A change in law clause typically provides that if there is a change in law after the contract is signed, a contractor will be entitled to compensation for the cost of complying with the change in law. Whether China’s change in policy constitutes a change in law depends on the contract in question.

Frustration

The common law doctrine of frustration may also be relevant. Frustration does not need to be explicitly set out in the contract. Frustration occurs by operation of law. A frustrated contract is a contract that, subsequent to its formation, and without fault of either party is incapable of being performed due to an unforeseen event, resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract. Frustration can be hard to prove and whether it can be made out by a contractor will depend on the circumstances.

Suspension and repudiation

The law of contract protects the binding nature of a lawful bargain. If one party unilaterally suspends the contract or indicates that it no longer intends to be bound by the contract, this can amount to ‘repudiation’ of the contract. A repudiation can be accepted by the other party and the contract terminated. The party accepting the repudiation can then seek damages. In the context of China’s policy shift, if suspension is being considered by one party, the consequences should be carefully considered in the context of a possible repudiation.

The uncertainty generated by China’s policy change is not likely to be resolved quickly. An essential element of any solution will be a sound understanding of the commercial agreements that are currently in place and how their terms apply to each individual circumstances.

Russell Kennedy Lawyers understands the waste and recycling industry. Our lawyers have extensive experience acting for industry, Local Government and State Government. We have specialists in commercial contracting and procurement, environmental regulation and planning.

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